The secret life of a deal: buying out Dow Chemical

They called it Project Achilles. That was the code name given to their secret plan for a $50 billion (Rs2.13 trillion today) takeover of Dow Chemical Co. last year. The planners were two of the company’s top executives and they were trying to orchestrate this huge deal behind the backs of Dow Chemical’s chief executive and board.

You might recall this sordid tale because the two executives were unceremoniously fired—with the executives claiming to have known nothing about the takeover talks. An acrimonious fight in court followed.

On Monday, duelling lawsuits ended in a settlement, and the gentlemen who said they categorically denied having tried to take over Dow Chemical changed their story: the men—Romeo Kreinberg, a former Dow executive vice-president, and J. Pedro Reinhard, the company’s former chief financial officer (and board member) who had been passed over for the top job—acknowledged “participating in discussions, which were not authorized by nor disclosed to Dow’s board concerning a potential LBO (leveraged buyout, or buying a business using mostly debt and a small amount of equity) of Dow”.

It’s quite an about-face. But more important, the case and its juicy depositions weren’t just about two rogue employees. It pulled the curtain back on a netherworld of deal makers on various continents who had become wrapped up in this plot. And it exposed just how some billion-dollar buyouts might have been done when credit was still easy and fees were plentiful.

An enormous cast of characters from Wall Street worked for months—some behind the backs of their own clients—to pursue a deal. The list of big names may surprise you: Henry R. Kravis of Kohlberg Kravis Roberts and Co., Peter A. Weinberg of Perella Weinberg Partners Lp. (formerly of Goldman Sachs Group Inc.), Martin Lipton of Wachtell, Lipton, Rosen and Katz, and yes, the man of the moment, James S. Dimon of JPMorgan Chase and Co.

As with most fables about money and power, this one starts with greed.

As Dow Chemical tells the story—at this point, its version is the more credible—the plot started in the fall of 2006.

The plan was to overthrow Dow Chemical’s chief executive, Andrew N. Liveris, and replace him with Reinhard and Kreinberg after the buyout.

In the space of several months, the plotters lined up financing from the Sultanate of Oman. UK-based investment bank JPMorgan Cazenove signed on to act as an adviser and financier, and Allen and Overy Llp. was retained as legal counsel.

Even before that, the men had tried to interest Leonard Blavatnik, the Russian-American businessman, in backing them; he initially turned them down, but then met with Kravis and Weinberg at his office in London to discuss the possibility of a takeover. Notes from that meeting said that “Henry will go meet with Liveris, but not mention Len” and that it would be best “to do it low key at a Business Council meeting”.

The roles and compensation packages for the two plotters were apparently constant topics. Eddie Wilson, a consultant working with the men and JPMorgan, testified “that Kreinberg would be in charge of the day-to-day operation of the company, while Reinhard would serve as chairman”. Reinhard sought $5 million from Oman to resign from Dow Chemical to work on the buyout. In addition, “there was a discussion around dividing the banking fee allocation” among the men, Wilson said.JPMorgan, which long considered Dow Chemical a client, seems to be in a terrible spot in this story. Perhaps the bank was duped, as it now claims. But it sure doesn’t seem that way from the now-disclosed documents. They show that the bank eagerly pursued the deal even though at least some of its top bankers knew full well that Dow Chemical’s board was not on board.

The deal even went through the bank’s conflicts committee. After the conflicts committee gave its approval, William T. Winters, co-head of JPMorgan’s global investment banking division, wrote in an email message: “Buyout team led by former Dow CFO. Not all members of the current senior Dow management team are involved.”

At another point, a firm memo said that the two men were “deliberately keeping low profile until further down track” and that they wanted “plausible deniability at this stage”.

JPMorgan executives met with Kreinberg and Reinhard in secret at a hotel, the Compleat Angler, around 64km outside London. A JPMorgan email message said the participants had “hired entire hotel for confidentiality”. It was only after that meeting that Winters determined that “management” is not on board, but rather a potentially rogue element.

And still JPMorgan continued to work on the transaction, and “pitched the transaction to KKR on 13 March and to TPG on 14 March”. It was only once news reports about a possible deal emerged—and Dow contacted JPMorgan—that it stopped working on the deal. That is also when everything unravelled.

To give him his due, it was Dimon of JPMorgan who identified the two men to Liveris. Perhaps he should get credit for doing the right thing, but he was also trying to save his own hide—which apparently he succeeded in doing, since Dow Chemical is still a JPMorgan client. Lipton, the Wall Street super lawyer, was called in at the end to oversee and bless the firings.

Given everything that happened, it is surprising that Dow Chemical settled—and apparently paid the men “a substantial sum,” according to people briefed on the settlement. Perhaps damning evidence about Dow’s own governance was going to emerge?

Now that the case is closed, what will be the fate of Kreinberg or Reinhard? Will they ever be able to work in the town again? Well, shocker of shockers, Reinhard is still a board member of Colgate-Palmolive. So, the next time you hear rumours about a buyout of that company...